Pension crisis about to hit cities and counties

Until now, the horrifying losses absorbed over the last two years by California’s largest public employee pension plan were mostly bad news that didn’t really affect anyone.

Here, for example, is what the California Public Employees’ Retirement System, better known as CalPERS, told its retired members early in the fall of 2008, when it had lost more than $70 billion on its investments so far that year, more than one-fourth of the previous $260 billion value of all its investments:

“It is important for you to know that the current credit crisis does not directly affect your retirement benefits, which are securely protected by law, or our ability to pay benefits.”

Translation: Not to worry; the taxpayers will have to bail us out.

In fact, retired public employees from the 2,000-odd cities and counties that contribute to the plan have not seen a nickel’s reduction in their stipends. CalPERS paid out $10.88 billion in retirement benefits in 2008, plus an estimated $5.7 billion in health benefits.

This meant, for instance, that in the small San Francisco suburb of San Bruno alone, 12 retirees received benefits totaling at least $100,000, with the top city retiree getting $187,358 for the year. Plenty of larger cities and counties had many more six-figure pensioners.

But until now, those cities and counties have not been forced to cut services and work forces or seek new taxes. That’s because the setting of CalPERS “dues” generally lags two years behind investment performance. Rates paid by member cities and counties have been flat during this fiscal year because fiscal 2007 was a very good year for CalPERS investments, the peak of the real-estate bubble producing gains of 19.1 percent on the huge fund’s often-risky investments.

That fat year is long past, and CalPERS will be challenged this year to attain the 7.75 percent annual gain on investments it has said it needs to meet its obligations. That’s where things get back to the reassuring statement the fund sent its pensioners 15 months ago.

For pensions are protected by law and contract, even when the pension fund can’t pay. Where does the money come from in such times? Cities and counties, of course. Us.

So CalPERS has warned state, city and county governments their annual pension contributions could increase by nearly one-third — the same percentage as the losses in the value of the fund’s investments during the disastrous 2008-09 nosedive of stocks, bonds and real estate. No one is quite sure what the fund will actually dun its contributors, though, as stock and bond markets might rebound before next summer even more than they already have. The CalPERS portfolio has reportedly recovered about $40 billion of its former value since bottoming out early last year along with the markets.

Contributions from cities, counties and special districts now come to about 13 percent of payroll, but that could rise anywhere from 2 percent to 5 percent of payroll despite efforts to spread the losses and increases in contributions over 30 years. “If investments perform well, then rates go down. If not, then rates have to go up,” Edward Fong, a CalPERS spokesman, told a reporter.

For a city like Fullerton, in Orange County, that could mean $5.5 million a year for four years in added payments that have to be made regardless of other obligations. Payments by larger cities might increase far more even as they’re seeing big drops in tax revenues from 2007 levels because of recession and the housing bust. For sure, labor unions won’t willingly give back any pension rights.

The result will be that hundreds of cities and counties will have to tap their rainy-day funds — if there’s anything still in them after two tough years. Some local governments will surely seek to cut employee pay, decreasing both direct expenses and pension contributions.

Because public employee pensions of all but a few cities, counties and other public entities are administered by CalPERS, the crunch will be felt in every part of the state — unless CalPERS’ investments suddenly pick up.

With that in mind, the fund has lately taken new risks, hoping to resolve its crisis internally rather than pass it along to participants. The beleaguered CalPERS board, under fire for making large payments to middlemen who steered it into bad investments in the past, has authorized a big increase in the percentage of plan holdings that can be invested in private equity funds — which took even bigger losses than publicly sold stocks during the crash. The hope is that these funds will also recover faster than stocks — but that’s only a hope.

In the end, taxpayers stand to pay plenty for all this, either through increased taxes or diminished public services — closed libraries and shelters for battered women, fewer trash pickups, shuttered courts, slower police and fire response times, more potholes, early county jail prisoner releases and much more — if local governments see layoffs and furloughs as their only way out.

— Thomas D. Elias of Santa Monica is an author and columnist. E-mail him at tdelias@aol.com.